What's changed

EU/China tariff talks support strong near-term demand. According toXinhua, China’s MOFCOM and the EU Trade Commission held first roundnegotiations on the solar dispute Jun 21 in Beijing, and a modestsettlement should be reached, while some restrictions on pricing/quantityof exporting Chinese modules are key negotiating tools. This softenedtone has created near-term demand momentum from Europe. Crosscheckingwith positive data received from the Intersolar Europe 2013conference, module suppliers cited “sold out” owing to rush orders fromEU – with some air-freight shipments – plus strength in Japan that is notabating soon. We expect continuous solid 3Q demand, as many Tier-1 USlistedmodule makers have pushed other regions’ order flow to lateJul/Aug, and the expectation of soon-to-be announced adjusted nationalsolar Feed-in Tariff, strong China demand flow in 2H13 to be led by largeutility projects, supported by stable demand flow from markets like Japan,US, Canada, S. Africa and Middle East. Global poly makers’ higherutilization rates have shown early signs of capacity/inventory constraintsat a low cost-based poly level. The top 4 poly makers are running atalmost full utilization rates, and last week, the spot poly price in Chinafinally rose 4% after weeks of softness since early Mar. Poly data pointsreceived from Intersolar also showed a slightly positive trend.

Implications

We see poly supply has reached a balance in low cost-based polycapacity, and expect GCL to pursue its “poly + wafer” strategy, with higherwafer shipments/higher utilization rates/low costs, and improve its 1H13solar material margin vs. 2H12.

Valuation

We retain our Director’s Cut 12-m TP of HK$3.0Key risksLower-than-expected demand/ASP; higher-than-expected costs.

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